RIETI Report March 2016

China Should Implement Capital Controls to Stem Capital Outflows

Finance ministers and central bank governors from the G20 major economies met in Shanghai on February 26-27, 2016 and discussed the growing uncertainty of global financial markets that was triggered by plunges in stock prices on the Shanghai Stock Exchange (SSE) since the beginning of this year, which has fallen by nearly 50% from its peak. The China-triggered financial turbulence is casting a shadow over the future course of the world economy. In the March issue of the RIETI Report, we present the column "China Should Implement Capital Controls to Stem Capital Outflows" by Visiting Fellow Hiroyuki Ito.

Ito looks at the past actions by the Chinese monetary authorities to stem the depreciation of the renminbi (RMB). However, the main problem is the mutual distrust between the regulatory authorities and the markets, which has caused further capital outflow. As the RMB now has become a part of the basket of currencies that constitute the International Monetary Fund's Special Drawing Rights, financial liberalization is required. Ito suggests that in order to stabilize the RMB and dispel the financial uncertainty, China has no other choice but to stop capital outflows through capital control. Instead of becoming locked in the vicious cycle of non-transparent market interventions and uncertainty-driven capital outflows, China should implement capital controls in a way that is acceptable to the international community, which is the best way to stabilize financial markets.

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China Should Implement Capital Controls to Stem Capital Outflows

ITO HiroyukiVisiting Fellow, RIETI

Finance ministers and central bank governors from the G20 major economies met in Shanghai on February 26-27, 2016. The discussion at the meeting centered on the growing uncertainty of global financial markets, that was triggered by plunges in stock prices on the Shanghai Stock Exchange (SSE) since the beginning of this year. Addressing the downside risk to the global economy, the ministers and governors pledged to "use all policy tools—monetary, fiscally, and structurally—individually and collectively" to support growth, while reaffirming that countries should "refrain from competitive devaluations."

By the end of February 2016, the SSE Composite Index fell by nearly 50% from its peak recorded in June 2015. Japan's Nikkei 225 stock index dropped by more than 15% during the first two months of 2016, and European and New York markets have since been experiencing bear markets. The China-triggered financial turbulence is casting a shadow over the future course of the world economy.

To read the full text
http://www.rieti.go.jp/en/papers/contribution/ito-hiroyuki/01.html

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